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Extraordinary sleight of hand on rail

By Peter V O'Brien

Friday 18th July 2003

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The agreement between "Her Majesty The Queen In Right of New Zealand" and Australian companies Toll Group (NZ) and Toll Holdings regarding Tranz Rail was an extraordinary piece of government and corporate sleight-of-hand saddled on Her Majesty because of the antiquated constitutional definitions of the government.

A straight reprint of the "Background" section of the agreement is the best way of showing the government's ability to escape from its shackles:

"A. The Crown has entered into a heads of agreement with Tranz Rail Holdings ('TRH') ... dated 6 June 2003 ...

B. Toll Group has made a takeover offer dated 23 June 2003 to purchase all of the equity securities in TRH...

C. The Crown and Toll Group have agreed certain matters as set out in the body of this agreement and Toll Holdings has agreed to procure that Toll Holdings meets its obligations under this agreement."

There we have it.

The government entered a heads of agreement with Tranz Rail in June and spent time giving the impression it had no interest in any alternative deal, subject to certain conditions being fulfilled regarding the June 6 proposal.

It then entered an agreement with Toll under which the Australian group withdrew its June takeover and substituted another and the government agreed to a replacement heads of agreement relevant to Tranz Rail provided Toll's new 95c share offer became unconditional.

Toll has to get 90% of Tranz Rail to make the offer unconditional. The government cannot lose, assuming either, or both, of its positions are considered "wins." A successful Toll offer, getting 90% of Tranz Rail, triggers the July agreement.

The June heads of agreement would reactivate if Toll's offer failed to become unconditional.

Her Majesty The Queen In Right of New Zealand has been either smart or rather devious with these deals.

A successful offer from Toll would show that New Zealand shareholders were willing to sell the country's sole rail complex to overseas interest in the open market, while leaving New Zealand (or "Her Majesty...") with what it wants in terms of the tracks and other matters.

New Zealand reverts to the June heads of agreement if Toll's offer fails, a move that should satisfy it, because the deal proposed in June can be presumed to be a satisfactory outcome for Her Majesty/New Zealand/the government.

Smart or devious depends on one's viewpoint. Ancillary actions can also be considered smart or devious.

It was reported last week that transport operator Mainfreight and some institutional shareholders were dealing with the government on July 6 to convince it to keep Tranz Rail in New Zealand ownership. They were unaware the government had cut the deal with Toll, which was announced on July 7.

Others were unaware. Tranz Rail said on July 7 it was "surprised" by the terms of a new joint agreement announced "between the government and Toll Holdings."

Chairman Wayne Walden said the company would evaluate the announcement overnight and would make no further comment until then.

Tranz Rail said on July 9 it had received Toll's offer, which was "an entirely new takeover offer and so all previous communication on past offers should be ignored."

The board would consider the offer and had asked corporate valuers Grant Samuel & Associates to appraise it.

Mr Walden said the company would communicate with shareholders and the board would make a recommendation "focused on the best interest of the company and shareholders." That is a board's duty but will be no more than a hollow formality.

Tranz Rail's board was bypassed when the government and Toll constructed their deal.

Success of the new takeover probably rests in the hands of a few institutional shareholders, who could stop the 90% condition unless there is an increased price.

The market price was above the bid price last Friday, reaching 97c, but that could have resulted from people playing games.

Institutions have to weigh up the possibility of a better offer (effectively calling Toll's bluff) against the offer failing to reach 90%, at which point we apparently revert to plan A, the June 6 heads of agreement.

Tranz Rail's board took another hit, whatever the outcome of the new offer, or reversion to plan A. It has been under siege for a long time and manages to worsen its position without outside help.

For example, on June 13 the company produced another set of freight-related statistics which missed several points. Over the preceding 12 months on-time departures and arrivals increased to 85% (meaning 15% were still late).

Cargo-handling errors were reduced 90% (meaning 10% of some base figure of cargo-handling errors still affected operations). Customer satisfaction rose from 30% to 78% (meaning 32% of customers were dissatisfied). It is hardly surprising the company is in a mess when it produces such twaddle.

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